Saturday, January 18, 2014

Savings, Credit Money, and Prosperity

Quinn Harris: We've got no landing gear, so we can't take off. Lightning fried the radio, so we can't call for help. AirSea will try a rescue mission, but without a beacon to hone in on it's like trying to find a flea on an elephant's ass. The only thing we've got is this flare gun and a single flair.
Robin Monroe: Is it too late to get it sugar coated?
Quinn Harris: That was sugar coated.
--Six Days Seven Nights

Interesting interview with Professor Hans-Hermann Hoppe on a variety of topics. Wanted to focus here on his response to an early question about why savings are vital to economic growth.

He poses a variation of the desert island situation involving two people, Crusoe and Friday. Crusoe catches fish. He can eat them now or put some aside and consume them later. In order to survive, Friday also needs to eat fish. One approach would be for each to catch fish and eat what they catch.

Another approach would be for Crusoe to save some of his catch, and then lend some fish to Friday while Friday engages in a project to build a fishing net. Because Friday could not build the net if he had to spend his time fishing, and because Friday needs fish in order to survive, Crusoe's savings are necessary in order to fund Friday's productivity improvement project. Once the net is completed, then many fish can be caught in a short period of time, thus freeing both Crusoe and Friday to engage in additional pursuits.

Suppose that instead of saving fish, Crusoe consumes all of his catch and then gives Friday a certificate that can be exchanged for fish. When Friday goes to Crusoe to exchange his certificate for fish, he learns that there are no fish. He must therefore delay his fishing net project and get busy fishing. If he does not do so, then he will starve.

Now let's take Hoppe's lesson a step further. Suppose that there are additional people on the island. A pile of fish has been set aside in previous periods. Crusoe wants to motivate lots of economic activity and productivity improvement, so he creates many paper certificates that allows the holders to claim fish. There is no limit to how many claims he can draw up. He hands out dozens to all others on the island.

Finite amount of savings. Infinite amount of claims on saved economic resources. What is likely to happen to the quantity of saved economic resources?

The lesson is that actual resources must be set aside, or saved, in order to advance productivity. Productivity cannot be advanced by issuing paper certificates (a.k.a. credit money) that serve as claims on resources. The more paper certificates issued, the greater the likelihood that savings are depleted and productivity stagnates or drops off.

1 comment:

dgeorge12358 said...

Tools and machinery are primarily not labor-saving devices, but means to increase output per unit of input.
~Ludwig von Mises